Fixed income mutual funds in India offer a stable way to grow wealth with low risk. These funds invest in bonds, government securities, and other debt instruments, prioritizing steady returns. What are they, and why invest? Let’s dive in.
What Are Fixed Income Mutual Funds?
Fixed Income Mutual Funds (FIMFs) are investment vehicles that primarily invest in debt instruments like government securities, corporate bonds, and money market instruments. Their primary objective is to provide investors with a steady income stream while preserving capital. These funds are ideal for conservative investors seeking stability and moderate returns.
Benefits: Stability and Regular Income
These mutual funds in India shine for their low volatility compared to equities. They offer steady returns, outpacing savings accounts (3-4%), per the Economic Times. Many also provide monthly dividends (IDCW) for retirees needing cash flow. In addition, diversification across issuers reduces default risk. In 2024, debt fund AUM hit ₹14.5 lakh crore, per AMFI, reflecting trust in their safety.
Taxation:
As of April 1, 2023, debt mutual funds are taxed according to the investor’s income tax slab, eliminating the previous indexation benefits. Short-term capital gains are taxed at the applicable slab rate, while long-term capital gains (LTCG) are also taxed at the same rate. This change aligns the taxation of FIMFs with that of fixed deposits, potentially impacting their tax efficiency.
Risks Associated:
While you can consider these mutual funds safer than equity funds, they are not risk-free. Some risks include:
- Interest Rate Risk: When interest rates rise, the value of existing bonds may fall, impacting the fund’s Net Asset Value (NAV).
- Credit Risk: The risk of the issuer defaulting on interest or principal payments, particularly in lower-rated bonds.
- Inflation Risk: High inflation can erode the real purchasing power of the income received.
- Liquidity Risk: Some bonds, especially corporate ones, may not be easily tradable, potentially impacting the fund’s liquidity during market stress.
Conclusion:
Fixed Income Mutual Funds in India offer a balanced approach to investing, combining steady income with professional management and diversification. While they come with certain risks, understanding these can help investors make informed decisions. For those seeking stability and moderate returns, FIMFs present a viable investment option.
– Ketaki Dandekar (Team Arthology)
Read more about Fixed Income Mutual Funds here – https://groww.in/fixed-income